Caterpillar Inc. (CAT): Were Hedge Funds Right About This Stock?

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Is Caterpillar Inc. (NYSE:CAT) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Caterpillar Inc. (NYSE:CAT) going to take off soon? Money managers were in an optimistic mood. The number of long hedge fund positions went up by 9 in recent months. Caterpillar Inc. (NYSE:CAT) was in 62 hedge funds’ portfolios at the end of June. The all time high for this statistic is 63. Our calculations also showed that CAT isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Ray Dalio of Bridgewater Associates

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let’s review the recent hedge fund action surrounding Caterpillar Inc. (NYSE:CAT).

Do Hedge Funds Think CAT Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 62 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. By comparison, 39 hedge funds held shares or bullish call options in CAT a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in Caterpillar Inc. (NYSE:CAT) was held by Bill & Melinda Gates Foundation Trust, which reported holding $2210.4 million worth of stock at the end of June. It was followed by Fisher Asset Management with a $1445.8 million position. Other investors bullish on the company included Citadel Investment Group, Diamond Hill Capital, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 9.26% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, designating 2.27 percent of its 13F equity portfolio to CAT.

As aggregate interest increased, specific money managers were breaking ground themselves. Renaissance Technologies, initiated the largest position in Caterpillar Inc. (NYSE:CAT). Renaissance Technologies had $226.9 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also initiated a $44.9 million position during the quarter. The following funds were also among the new CAT investors: Ray Dalio’s Bridgewater Associates, Alexander Mitchell’s Scopus Asset Management, and Gregg Moskowitz’s Interval Partners.

Let’s check out hedge fund activity in other stocks similar to Caterpillar Inc. (NYSE:CAT). These stocks are TotalEnergies SE (NYSE:TTE), General Electric Company (NYSE:GE), HSBC Holdings plc (NYSE:HSBC), Vale SA (NYSE:VALE), The Estee Lauder Companies Inc (NYSE:EL), 3M Company (NYSE:MMM), and Advanced Micro Devices, Inc. (NASDAQ:AMD). This group of stocks’ market caps match CAT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TTE 15 1132420 -2
GE 67 6087180 -1
HSBC 11 212763 -1
VALE 27 3573958 -4
EL 50 4129744 -9
MMM 42 1582540 1
AMD 63 4610011 1
Average 39.3 3046945 -2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.3 hedge funds with bullish positions and the average amount invested in these stocks was $3047 million. That figure was $5264 million in CAT’s case. General Electric Company (NYSE:GE) is the most popular stock in this table. On the other hand HSBC Holdings plc (NYSE:HSBC) is the least popular one with only 11 bullish hedge fund positions. Caterpillar Inc. (NYSE:CAT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CAT is 85.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 26.3% in 2021 through October 29th and beat the market again by 2.3 percentage points. Unfortunately CAT wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on CAT were disappointed as the stock returned -5.8% since the end of June (through 10/29) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.